0

Three Companies That Are Winning Over the Internet

Hard-line retailers have already began adjusting to a new generation that use the Internet and social media as part of their buying experience. I have selected companies that have done an exceptional job focusing on either a digital strategy to create new revenue streams or creating extensive social-media outreach programs to better engage, inform and educate customers about products.

The hard facts

We are in an era where the Internet offers us access to countless review sites, blogs, and social media platforms to help consumers decide on a purchase. By 2010, most big brands had created both Facebook and Twitter profiles to begin engaging with their customers.

A study by L2 Think Tank examined 247 top global brands across 15 social-media platforms and found that on average, most top brands are active on five-to-nine social media platforms. Naturally, Facebook, Twitter, YouTube, Pinterest, and Instagram are the top names within the social media universe.

IT spending and other capital spending will remain elevated for most companies, but those that do not make the necessary investments will fall behind.

Not the kind of company you would expect to top the list

In my view, Home Depot (NYSE: HD) has done an outstanding job adapting to the new wave of younger, digitally connected consumers. Management has emphasized the importance of connecting with customers on their terms, no matter when, where and how. As a result, Home Depot recently noted that online traffic increased over 50%.

The company offers online purchases that can be picked up in a store in a few hours. Customers can schedule appointments online for in-home quotes on larger projects, such as flooring. A store associate will come to the consumer's home and provide measurements and more detailed pricing. In addition, Home Depot keeps its customers connected in-store with free WiFi available to look up prices, read reviews, find item locations and more through the company app.

Home Depot continues to reach consumer through platforms such as YouTube, which has proven to be an effective tool. The company offers thousands of instructional videos for do-it-yourself (DIY) home-improvement projects.

More recently, Home Depot began reaching out to its customer through a series of apps that have more than 4 million downloads and a four-or-five-star rating on the iOS app platform. The company will roll out its "pro-app" later this year, which will make purchases for professional customers much easier. The pro-app tracks previous orders and is available on the go with a wide range of pickup/delivery options.

Already the most effective digital retailer

One of my fiancee's favorite stores, Williams-Sonoma (NYSE: WSM) , is perhaps the most effective digital retailer in the home-furnishing sector, and its growth remains robust. The company has built up a database of over 50 million customers over several decades and has leveraged this to build a highly effective direct-market platform, making it well positioned for the digital age.

During the company's 1Q 2013 conference call, Pat Connoly, the chief marketing officer, commented: "I think we're the most profitable e-commerce company in America, and at the same time we grew from number 25 up to number 22 in the Internet retailer ranks and had the 19th highest growth rate."

The company has what I believe to be the cleanest, nicest, and easiest to navigate website in the industry. This shows, as the company noted $1.6 billion in online sales in 2012, an increase of 17.4% over the previous year. In addition, the company's Pinterest page features hundreds of pins for recipes that showcase the same products that can be bought online and in stores. Williams-Sonoma also interacts with the user base by answering specific questions regarding products used in pictures.

Investors should reasonably expect the company to continue building on its proven success in the digital space. Williams-Sonoma has prioritized increasing its technological capabilities, as IT spending and e-commerce are the second largest component of capex behind new stores and remodels.

Source: The company's Pinterest page

Why not enter the digital space?

GameStop (NYSE: GME) has a lot of potential upside in the digital space. While many of GameStop's traditional customers are not the type to shop online (as they want to purchase new games on the release date in-store and not wait or chat with associates to gain further expertise), the company can complement its core business through the growth of online and mobile games.

While console-based sales have fallen over the last four years, digital gaming has been growing steadily. In 2010, GameStop purchased Kongregate, an online- gaming website which was originally dubbed a "new site [that] aims to be the YouTube of gaming."

Kongregate earns revenue from in-game advertising and through the purchase of virtual goods to advance a user's game play. According to Businessweek, Kongregate has a proprietary virtual currency called kreds, which can be purchased securely and immediately. The company reported in its 2012 annual report over 17,000 developers have uploaded more than 65,000 games that have been played nearly 3 billion times.

The emergence of digital gaming is an important opportunity for the company and serves as a hedge against the core business that can come under threat from other large retailers (such as Wal-Mart). Investor fears are still fresh in everyone's minds regarding the inability of GameStop to sell previously-owned Xbox One and PS4 games.

Conclusion

The biggest driver for the economy over the next 10-to-15 years will be the rising number of people in their 30's (in their 20's and late-teens today). Social media is here to stay and it is uncommon to find anyone in their late teens to 20's that is not on at least one of the popular sites.

Judging from the direction we are heading in, I believe advertising and interaction on social media will replace television, radio and other traditional media outlets in the near future. The companies that I have mentioned understand this fact, and have done an excellent job raising awareness and building a brand image to drive future growth. As such, these companies have an advantage over competition that is slow to enter the game.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.